2023 Weekly Views

Highlights

Q4 earnings

In the US, 45% of companies have reported, and 21% in Europe, so far. In the US, 68% of S&P500 companies that have reported beat EPS estimates. EPS growth is -5% y-o-y, surprising positively by 1%. Of the key sectors, Energy, Industrials and Discretionary are reporting strong growth, while Materials, Financials, Tech and Communication Services are down double-digit on EPS growth. Top-line growth in the US is at +4% y-o-y, surprising positively by 2%. In Europe 59% of companies beat EPS estimates. Q4 EPS growth is coming in at +4% y-o-y, surprising positively by 6%. At a sector level, Energy and Industrials have reported healthy earnings growth, while Materials, Discretionary, Tech and Communication Services are down on a y-o-y basis. Revenue growth is coming in at+12% y-o-y, surprising positively by 2%. Stocks that are missing EPS estimates are being penalized severely in both the US and Europe this quarter. On the other hand, stocks that are beating estimates are in line with their historical median in the US, and slightly above their median in Europe.

Rates

US Treasuries fell back on Friday as markets priced in higher Fed rates. Policy sensitive 2yr UST yields spiked +18.4bps on Friday, closing up +8.9bps over the week. 10yr UST also retreated, with yields up +13.2bps on Friday (after the strong jobs report) and up +2.1bps for the week. In Germany, the story was similar, with 2yr Bund yields climbing higher by +7.1bps to 2.53%, although they were down by -3.3bps in weekly terms. 10yr Bunds also retreated, with yields up +11.3bps on Friday to 2.19% but down -4.7bps on the week. French OATs were up +12.7bps (-6.0bps on the week), Italian BTPs up +12.2bps (-7.2bps on the week after the biggest fall in a decade on Thursday after the ECB).

Market update

Dovishness being tested

The S&P 500 closed the week at 4,136.48, +1.62% higher. The Dow Jones closed at 33,926.01, -0.15%, with the Nasdaq higher by +3.31%. The volatility index VIX closed the week at 18.33 down from 18.51. The Euro Stoxx 600 surged +1.23%.

The 10-year UST closed at 3.52% up from 3.50% a week before. The yield curve is inverted with the yield spread between the 3-month and 10-year UST at -114bps. US Corporate Bond spreads: Investment Grade tightened 6bps at 183bps and High Yield tightened 25bps at 437bps. German 10-year Bunds yield closed at +2.19% down from +2.24% a week before. In Europe, Corporate Investment Grade spreads tightened 4bps at 161bps and High Yield spreads tightened 8bps at 469bps.

The US Dollar Index (DXY) appreciated +0.97% last week and closed at 102.92. The Euro closed at 1.0795 (-0.67% weekly); the Yen depreciated -1.01%, closing at 131.19 and the Swiss Franc depreciated -0.55%, closing at 0.9261. Gold closed at $1,864.97 depreciating -3.27%. Oil was down, Brent closed at $79.94 (-7.75%) and WTI at $73.39 (-7.89%).

Macroeconomy

Central banks

The Federal Reserve raised its federal funds target range by 25bps to 4.50-4.75%, in line with market expectations. The statement warned of “ongoing increases” in rates ahead, as Chairman Powell warned that the job of fighting inflation was still not over. While the disinflationary process has started for goods, it is not yet visible in the price for services, he said. But Powell also acknowledged that the Fed had to be sensitive to the policy lags. The ECB delivered a well-flagged 50bps rate hike while committing explicitly to another 50bps hike in March. A few new elements left a dovish aftertaste like the lack of rate path commitment beyond March. The Bank of England hiked rates by 50bps to 4.0% (vote was 7 versus 2). The Bank seemed still worried about the persistence of inflation due to ongoing strong wage growth. Analysts expect another 50bps hike at the next meeting (23 March) as wage growth is expected to stay high.

Jobs report

The US economy added a massive 517k jobs in Jan. far above the 188k expectation and up from 223k. This is the biggest monthly jobs addition since July 2022. Nov. and Dec. were revised upward by a combined 71k. Job growth in Jan. was widespread, led by gains in leisure and hospitality, professional and business services, and health care. Employment also increased in government, partially reflecting the return of workers from a strike. The unemployment rate fell to 3.4%, down from 3.5% in Dec. and below the 3.6% forecast. The participation rate rose to 62.4%, up from 62.3% in Dec. Average hourly wages came in +0.3% m-o-m (in line with consensus) and +4.4% y-o-y, but down from +4.6% in Dec. The workweek lengthened to 34.7 hours, up from 34.4 hours in Dec. and ahead of the consensus at 34.3-hour forecast.

Europe economic data

Euro area headline inflation (flash) eased to 8.5% y-o-y in Jan. from 9.2% in Dec., while core inflation remained stable at 5.2%. Energy was the major factor behind the deceleration in price increases last month. Meanwhile, core goods inflation (+44bps to 6.9%) was up again while services (-19bps to 4.2%) eased somewhat in Jan. Despite the energy crisis, the euro area economy once again defied expectations. According to Eurostat’s preliminary estimate, euro area GDP grew by 0.1% q-o-q in Q4. Germany’s (-0.2% q-o-q) and Italy’s (-0.1%) economies contracted slightly as they have suffered more from the energy crisis than France (+0.1%) and Spain (+0.2%). Data were distorted by sharp expansion in Ireland (+3.5%), driven by multinationals’ accounting practices. Excluding Ireland, euro area GDP would have been flat (-0.02%) in Q4.

China PMI

China PMIs rebound in Jan. on strong momentum in services sector. The services sub-index improved notably to 54.0 in Jan., from 39.4 in Dec. Business expectations also improved significantly and registered the highest level since June 2012. While there is a broad-based recovery in industrial activities, the strength of rebound is relatively modest, particularly for exporters and SMEs. The weakening global demand and a still-muted labor market should continue to weigh on the economy.

What to watch

• Monday: US ISM manuf. index (Apr.)
• Tuesday: Australia RBA decision (May); Euro area: final PMIs, M3 (Mar.), Bank Lending Survey (Q1), flash HICP (Apr.); US durable goods (Mar.)
• Wednesday: US FOMC decision (May); US ISM non-manufacturing index (Apr.)
• Thursday: Norway Norges Bank decision (May); Euro area ECB decision (May); US trade balance (Mar.)
• Friday: Germany factory orders (Mar.); US: nonfarm payrolls (Apr.)